[Federal Register: December 16, 2002 (Volume 67, Number 241)]
[Notices]
[Page 77108-77114]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16de02-85]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46971; File No. SR-CBOE-2002-67]
Self-Regulatory Organizations; Notice of Filing of a Proposed
Rule Change and Amendment No. 1 Thereto by the Chicago Board Options
Exchange, Inc. Amending the Margin Rule 12.3 to Incorporate Security
Futures
December 9, 2002.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(''Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 1, 2002, the Chicago Board Options Exchange, Inc. (``CBOE''
or ``Exchange'') filed with the Securities and Exchange Commission
(''Commission'' or ``SEC'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the CBOE.
On November 21, 2002, the CBOE filed an
[[Page 77109]]
amendment to the proposed rule change.\3\ The Commission is publishing
this notice to solicit comments on the proposed rule change, as
amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Madge M. Hamilton, Senior Attorney, CBOE, to
Theodore R. Lazo, Senior Special Counsel, Division of Market
Regulation (``Division''), Commission, dated November 20, 2002
(''Amendment No. 1''). Amendment No. 1 makes technical changes to
the proposed rule text.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend its margin rules under CBOE Rule
12.3 to incorporate security futures. Below is the text of the proposed
rule change, as amended. Proposed new language is italicized; proposed
deletions are bracketed.
* * * * *
Chicago Board Options Exchange, Incorporated
Rules
* * * * *
Chapter XII
Margins
Rule 12.1 No change
Rule 12.2 Time Margin Must Be Obtained
(a) Securities Other Than Security Futures Contracts. The amount of
initial margin, or payment in respect of cash account transactions,
required by this Rule shall be obtained as promptly as possible and in
any event within one payment period as defined in Section 220.2 of
Regulation T of the Board of Governors of the Federal Reserve System.
The amount of maintenance margin required by this Rule shall be
obtained as promptly as possible and in any event within 15 business
days.
Rule 12.3 Margin Requirements
(a) No change
(b) Customer Margin Accounts--General Rule. Subject to the
exceptions set forth in parts (c) and (k) hereof, the minimum amount of
margin which must be maintained in margin accounts of customers having
positions in securities shall be as follows:
(1) No change
(2) No change
(c)-(e) No Change
(f) Market maker and specialist accounts.
(1) Definitions. For purposes of this section (f), the following
terms shall have the meanings specified below.
(A) The term ``related instrument'' within an option class or
product group means any related derivative product, including security
futures contracts, that meets the offset level requirements for product
groups under Rule 15c3-1 of the Exchange Act, or any applicable SEC
staff interpretations or no-action positions (hereinafter referred to
as SEC Rule 15c3-1).
(B) The term ``product group'' means two or more option classes,
related instruments, and qualified stock baskets for which it has been
determined that a percentage of offsetting profits may be applied to
losses in the determination of net capital as set forth in SEC Rule
15c3-1.
(C) The term ``option class'' refers to all option contracts
covering the same underlying instrument.
(D) The term ``underlying instrument'' refers to long and short
positions covering the same security, or a security which is
exchangeable for or convertible into the underlying security within a
period of 90 days. The term underlying instrument shall not be deemed
to include securities options, futures contracts, options on futures
contracts, security futures contracts, qualified stock baskets, or
unlisted instruments.
(E) The term ``qualified stock basket'' shall have the meaning as
defined in SEC Rule 15c3-1.
(F) The term ``net liquidating equity'' shall mean the sum of
positive cash balances and long securities positions less negative cash
balances and short securities positions held in the accounts.
(2) The following positions of members may be carried upon a margin
basis that is satisfactory to the member and the carrying broker or
dealer:
(A) positions in which the member makes a market and permitted
offset transactions as defined below[.] and
(B) positions in security futures contracts that qualify for
exclusion from the margin requirements of SEC and Commodity Futures
Trading Commission (``CFTC'') regulations pursuant to SEC Rule
400(c)(2)(v) under the Exchange Act and CFTC Rule 41.42(c)(2)(v), and
any permitted offset transactions designated by the exchange or
association upon which the member trades the security futures contract.
Notwithstanding the other provisions of this paragraph (f), a member
organization may clear and carry the market-maker permitted offset
positions of one or more registered specialists, registered market-
makers, or Designated Primary Market-Makers pursuant to the rules of a
national securities exchange (all of which are deemed specialists for
all purposes under the [Securities] Exchange Act [of 1934])
(hereinafter referred to as ``market-maker(s)'') upon a margin basis
satisfactory to the concerned parties. The amount of any deficiency
between the equity maintained by the market-maker and the haircuts
specified in SEC Rule 15c3-1 shall be considered as a deduction from
net worth in the net capital computation of the carrying broker or
dealer.
(3) Permitted Offset Transactions.
(A) For purposes of this subparagraph (f)(3), a permitted offset
position means, in the case of an option in which a market-maker makes
a market, a position in the underlying instrument or other related
instrument, and in the case of other securities in which a market-maker
makes a market, a position in options overlying the securities in which
a market-maker makes a market, if the account holds the following
permitted offset positions:
(i) A long position in the underlying instrument or security
futures contract offset by a short option position which is ``in or at
the money'';
(ii) A short position in the underlying instrument or security
futures contracts offset by a long option position which is ``in or at
the money'';
(iii) A stock position resulting from the assignment of a market-
maker short option position or delivery in respect of a short security
futures contract;
(iv) A stock position resulting from the exercise of a market-maker
long option position or taking delivery in respect of a long security
futures contract;
(v) A net long position in a security (other than an option) in
which a market-maker makes a market;
(vi) A net short position in a security (other than an option) in
which the market-maker makes a market; or
(vii) An offset position as defined in SEC Rule 15c3-1, including
its appendices, or any applicable SEC staff interpretation or no-action
position
Permitted offset transactions must be effected for market-making
purposes such as hedging, risk reduction, rebalancing of positions,
liquidation, or accommodation of customer orders, or other similar
market-maker purpose.
For purposes of this subparagraph (f)(3), the term ``in- or at-the-
money'' means the current market price of the underlying security is
not more than two standard exercise intervals below (with respect to a
call option) or above (with respect to a put option) the exercise price
of the option; the term ``in the money'' means the current market price
of the underlying instrument or index is not below (with respect to a
call option) or above (with respect to a put option) the exercise price
of the option; and, the term ``overlying option'' means
[[Page 77110]]
a put option purchased or a call option written against a long position
in an underlying instrument, or a call option purchased or a put option
written against a short position in an underlying instrument.
(B) Reserved
(C)(1) Reserved
(2) For any member which acts as a Market-Maker on the Exchange,
the carrying member organization may combine all Market-Maker accounts
in which the Market-Maker or its nominee(s) participates, with the
exception of joint accounts in which the Market-Maker or its nominee
are not the sole participants, for purpose of computing its
requirements as prescribed by SEC Rule 15c3-1.
(3) On any business day on which positive net liquidating equity is
not maintained in the account(s), the carrying member organization must
make a call to the member for additional equity at least equal to the
deficit and must notify the Exchange's Department of Financial
Compliance of the deficit. The carrying member organization may extend
no further credit in the account(s) until the account(s) maintains a
positive net liquidating equity and, if the member organization's call
for additional equity is not met, steps should be taken promptly to
liquidate the positions in the account(s). If the deficit is not
resolved by noon of the following business day the carrying member
organization must send telegraphic notice to the Exchange as well as
the regional and national offices of the Securities and Exchange
Commission. However, nothing in this subparagraph (C) shall prohibit
the carrying firm from effecting hedging transactions in the deficit
account with the prior written approval of the carrying firm's SEC
designated examining authority.
(4) In the case of a joint account carried by a member organization
for a Market-Maker or specialist in which the Member Organization
participates, the margin deposited by the other participants may be in
any amount which is mutually satisfactory.
(g)(i) Broker-Dealer Account. A member organization may carry the
proprietary account of another broker-dealer, which is registered with
the SEC, upon a margin basis which is satisfactory to both parties,
provided the requirements of Regulation T of the Board of Governors of
the Federal Reserve System and, in respect of security futures
contracts, SEC Rules 400 through 406 under the Exchange Act and CFTC
Rules 41.42 through 41.48 are adhered to and the account is not carried
in a deficit equity condition. The amount of any deficiency between the
equity maintained in the account and the margin required by the other
provisions of this Rule shall be deducted in computing the Net Capital
of the member organization under Rule 15c3-1 of the Exchange Act.
(ii) Requirements for Joint Back Office Participants. A member
organization may carry the accounts of joint back office (``JBO'')
participants upon a margin basis which is satisfactory to both parties,
provided the requirements of Regulation T Section 220.7 and CBOE Rule
13.4 are adhered to and the account has a minimum equity of not less
than $1,000,000. If equity is below $1,000,000 the carrying
organization must issue a call for additional funds or securities which
shall be obtained within five business days.
(h) Notwithstanding any provisions of paragraphs (b) through (g)
and (k) hereof, the Exchange may at any time impose higher margin
requirements in respect of positions in any security (including any
series of options dealt in on an exchange) when it deems such higher
margin requirements to be advisable in light of the price of the
security or in light of existing market conditions pertaining generally
or with respect to such security.
(i) For the purpose of effecting new securities transactions and
commitments, the customer shall be required to deposit margin or have
equity in cash and/or securities in the account which shall be at least
the greater of:
(1) The amount specified in Regulation T of the Board of Governors
of the Federal Reserve System[,] and, in respect of security futures
contracts, SEC Rules 400 through 406 under the Exchange Act and CFTC
Rules 41.42 through 41.48, or
(2) The amount specified in paragraphs (b), [and] (c) and (k) of
this Rule, or
(3) Such greater amount as the Exchange may from time to time
require for specific securities, or
(4) Equity of at least $2,000 except that cash need not be
deposited in excess of the cost of any security purchased (this equity
and cost of purchase provision shall not apply to ``when distributed''
securities in a cash account).
Withdrawals of cash or securities may be made from any account which
has a debit balance, ``short'' position or commitments, provided the
account is in compliance with Regulation T of the Board of Governors of
the Federal Reserve System and the security futures contract margin
requirements pursuant to SEC Rules 400 through 406 under the Exchange
Act and CFTC Rules 41.42 through 41.48, and after such withdrawal the
equity in the account is at least the greater of $2,000 or an amount
sufficient to meet the maintenance margin requirements of this Rule.
(j) Reserved
(k) Security Futures Contracts. Nothing in this paragraph (k) or
other rules of this Chapter XII shall be applicable to security futures
contract transactions and positions in a futures account.
(1) General Rule. In relation to security futures contracts, no
member organization may effect a transaction or carry an account for a
customer, whether a member or nonmember of the Exchange, without proper
and adequate margin in accordance with this Chapter XII, all other
applicable rules of the Exchange, SEC Rules 400 through 406 under the
Exchange Act and CFTC Rules 41.42 through 41.48. No transaction in a
security futures contract may be effected, nor may a position in a
security futures contract be carried, in a securities cash account.
(2) Time Allowed for Obtaining Margin. If initial or maintenance
margin owed is not obtained prior to the day on which the account is
deemed undermargined for purposes of SEC Rule 15c3-1(c)(2)(xii), member
organizations must comply with the provisions of paragraph (k)(3)
below. Extensions of time shall be unavailable.
(3) Net Capital. In computing its net capital, a member
organization shall deduct any initial or maintenance margin deficiency
attributable to security futures contracts in accordance with the
undermargined account provision of SEC Rule 15c3-1(c)(2)(xii).
(4) Day Trading. Day trading rules shall not be applicable to
security futures contracts.
(5) Definitions. For the purposes of this paragraph (k), the
following terms shall have the meanings specified below.
(A) The term ``security futures contract'' means a ``security
future'' as defined in Section 3(a)(55) of Exchange Act.
(B) The term ``current market value'', with respect to security
futures contracts, means ``current market value'' as defined in SEC
Rule 401(4)(i)(A) or (4)(i)(B), whichever is applicable, under the
Exchange Act and CFTC Rule 41.43(4)(i)(A) or (4)(i)(B), whichever is
applicable.
(C) The term ``underlying security'' means, in the case of
physically settled security futures contracts, the security that is
delivered upon expiration of the
[[Page 77111]]
contract, and, in the case of cash settled security futures contracts,
the security or securities index the price or level of which determines
the final settlement price for the security futures contract upon its
expiration. The term ``underlying security'' also means, in the case of
a securities index, an underlying stock basket, or equivalent units of
a registered investment company meeting the criteria set forth in CBOE
Rule 5.3 and the Interpretations and Policies there under.
(D) The term ``underlying basket'' means, in the case of a
securities index, a group of securities futures contracts where the
underlying securities as defined in paragraph (C) above include each of
the component securities of the applicable index and which meets the
following conditions (i) the quantity of each underlying security is
proportional to its representation in the index, (ii) the total market
value of the underlying securities is equal to the aggregate value of
the applicable index, (iii) the basket cannot be used to offset more
than the number of contracts or warrants represented by its total
market value, and (iv) the security futures contracts shall be
unavailable to support any other contract or warrant transaction in the
account.
(6) Exceptions. For the offsetting positions specified in the table
below, member organizations may apply the corresponding initial and
maintenance margin requirement minimums, notwithstanding the margin
required on a security futures contract pursuant to paragraph (k)(1)
above, or on other securities pursuant to paragraphs (b) and (c) of
this Rule.
All options referred to mean options on the underlying security,
not the security futures contract.
All requirements that are expressed in terms of an option's
exercise price, in-the-money amount, and out-of-the-money amount mean
the aggregate amount (i.e., multiply by number of shares per contract
or the contract multiplier).
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Security futures contract Margin account initial Margin account
type requirement maintenance requirement
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Long and Short Security Futures Single Stock, Narrow- 5% of the current market Same as initial.
Contract. Based Index. value of the long or
same underlying.................. short security futures
different expiration months...... contract, whichever is
same or different market(s)...... greater.
Single Stocks vs. Narrow- 5% of the current market Same as initial.
Based Index 1. value of the long or
short security futures
contract(s), whichever
is greater.
Long and Short Security Futures Single Stock Narrow-Based 3% of the current market Same as initial.
Contract. Index. value of the long or
same underlying.................. short security futures
same expiration month............ contract, whichever is
different markets 2.............. greater.
Long Security Futures Contract Single Stock............. None required on long None required on long
and Short Underlying. security futures security futures
same underlying.................. contract. Short sale contract. Short stock
proceeds plus 50% requirement is 105% of
requirement on short stock market value.
stock position.
Narrow-Based Index....... None required on long None required on long
security futures security futures
contract. Short sale contract. Short stock
proceeds plus 50% basket requirement is
requirement on short 105% of basket market
stock basket.3. value.
Long Security Futures Contract Single Stock, Narrow- 20% of the current 20% of the current
and Short Call. Based Index. market value of the market value of the
same underlying.................. long security futures long security futures
contract plus any call contract plus any call
in-the-money amount. in-the money amount.
None required on short
call. Proceeds from the
call sale may be
applied.
Single Stocks 4 vs. 20% of the current 20% of the current
Narrow-Based Index Call market value of the market value of the
Option. long basket of security long basket of security
Narrow-Based Indices 4 futures contracts plus futures contracts plus
vs. Broad-Based Index any call in-the-money any call in-the-money
Call Option. amount. None required amount.
on short index call.
Proceeds from the call
sale may be applied.
Long Security Futures Contract Single Stock, Narrow- 20% of the current 10% of the put exercise
and Long Put. Based index. market value of the price plus any put out-
same underlying.................. long security futures of-the-money amount or
contract Pay for long 20% of the current
put in full. market value of the
long security futures
contract, whichever is
lower.
Single Stocks 4 vs. 20% of the current 10% of the index put
Narrow-Based Index Call market value of the exercise price plus any
Option. long basket of security put out-of-the-money
Narrow-Based Indices 4 futures contracts. Pay amount or 20% of the
vs. Broad-Based Index for long index put in current market value of
Put Option. full. the long basket of
security futures
contracts, whichever is
lower.
Short Security Futures Contract Single Stock............. None required on the 5% of the current market
and Long Underlying. short security futures value of the long stock
same underlying.................. contract. 50% position.
requirement on long
stock position.
[[Page 77112]]
Narrow-Based Index....... None required on the 5% of the current market
short narrow-based value of the long stock
security futures basket 4
contract. 50%
requirement on long
stock basket.4.
Short Security Futures Contract Single Stock............. None required on the 10% of the current
and Long Marginable Convertible short security futures market value of the
5. contract. 50% long convertible
same underlying.................. requirement on long security.
convertible security.
Short Security Futures Contract Single Stock............. 20% of the current 10% of the call exercise
and Long Call 6. market value of the price plus any call out-
same underlying.................. short security futures of-the-money amount or
contract. Pay for long 20% of the current
call in full. market value of the
short security futures
contract, whichever is
lower.
Single Stocks 4 vs. 20% of the current 10% of the index call
Narrow-Based Index Call market value of the exercise price plus any
Option. short basket of call out-of-the-money
Narrow-Based Indices 4 security futures amount or 20% of the
vs. Broad-Based Index contracts. Pay for long current market value of
Call Option.. index call in full. the short basket of
security futures
contracts, whichever is
lower.
Short Security Futures Contract Single Stock............. 20% of the current 20% of the current
and Short Put. market value of the market value of the
same underlying.................. short security futures short security futures
contract plus any put contract plus any put
in-the-money amount. in-the-money amount.
None required on short
put. Proceeds from the
put sale may be applied.
Single Stocks 4 vs. 20% of the current 20% of the current
Narrow-Based Index Put market value of the market value of the
Option. short basket of short basket of
Narrow-Based Indices 4 security futures security futures
vs. Broad-Based Index contracts plus any put contracts plus any put
Put Option.. in-the-money amount. in-the-money amount.
None required on short
index put. Proceeds
from the index put sale
may be applied.
Long Security Futures Contract, Single Stock............. 20% of the current 10% of the exercise
Short Call and Long Put. Narrow Based Index....... market value of the price plus any call in-
same underlying.................. Single Stocks 4 vs. long security futures the-money amount.
put and call must have same Narrow-Based Index contract(s) plus any
exercise price. Options.. call in-the-money
Narrow-Based Indices 4 amount. Pay for long
vs. Broad-Based Index put in full. None
Options.. required on short call.
Proceeds from call sale
may be applied.
Long Security Futures Contract, Single Stock............. 20% of the current 10% of the put exercise
Short Call and Long Put. Narrow Based Index....... market value of the price plus any put out-
same underlying.................. Single Stocks 4 vs. long security futures of-the-money amount, or
put exercise price must be below Narrow-Based Index contract(s) plus any 20% of the call
call exercise price. Options.. call in-the-money exercise price plus any
Narrow-Based Indices 4 amount. Pay for long call in-the-money
vs. Broad-Based Index put in full. None amount, whichever is
Options.. required on short call. lower.
Proceeds from call sale
may be applied.
Short Security Futures Contract, Single Stock............. 20% of the current 10% of the exercise
Long Call and Short Put. Narrow Based Index....... market value of the price plus any put in-
same underlying.................. Single Stocks 4 vs. short security futures the-money amount.
put and call must have same Narrow-Based Index contract(s) plus any
exercise price. Options.. call in-the-money
Narrow-Based Indices 4 amount. Pay for long
vs. Broad-Based Index put in full. None
Options.. required on short put.
Proceeds from put sale
may be applied.
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1 A long (short) basket of security futures contracts on individual
equities offset with a short (long) security futures contract on a
narrow-based index. A basket of security futures contracts must qualify
as an ``underlying basket'' in accordance with CBOE Rule 12.3(k)(5)(D).
2 Contract specifications must be substantively identical.
3 The stock basket must qualify as an ``underlying stock basket''
in accordance with CBOE Rule 12.3(a)(7).
4 A basket of security futures contracts must qualify as an
``underlying basket'' in accordance with CBOE Rule 12.3(k)(5)(D).
5 The convertible security must be immediately exchangeable for or
convertible into, without restriction (including the payment of money),
the security underlying the single stock future.
6 A long warrant (issued by the issuer of the underlying security)
is also permitted (single stock futures only). The long warrant must be
paid for in full and shall have no value for margin purposes.
* * * Interpretations and Policies:
.01-.15 No change
Rule 12.4 No change
Rule 12.5. Determination of Value for Margin Purposes
Positions in active securities, except security futures contracts,
dealt in on a recognized exchange (including option contracts) shall,
for margin purposes, be valued at current market value prices; provided
that, whether or not dealt in on an exchange, only those options
[[Page 77113]]
contracts on a stock or stock index, or a stock index warrant, having
an expiration that exceeds 9 months and which are listed or guaranteed
by the carrying broker-dealer, may be deemed to have market value for
the purposes of Rule 12.3(c). Security futures contracts shall have no
value for margin purposes. Positions in other securities shall be
valued conservatively in the light of current market prices and the
amount of anticipated realization upon a liquidation of the entire
position. Substantial additional margin must be required in all cases
where the securities carried are subject to unusually rapid or violent
changes in value, or where the amount carried is such that they cannot
be liquidated promptly.
12.6 No change
12.7 No change
12.8 No change
Rule 12.9. Meeting Margin Calls by Liquidation Prohibited
No Member Organization shall permit a customer to make a practice
of effecting transactions requiring initial or additional margin or
full cash payment and then furnishing such margin or making such full
cash payment by liquidation of the same or other commitments. The
provisions of this Rule shall not apply to margin calls attributable to
security futures contract transactions nor to any account maintained
for another broker or dealer, exclusive of the partners, officers and
directors of such other broker or dealer, provided such other broker or
dealer is a Member Organization of the Exchange or has agreed in good
faith with the Member Organization carrying the account that he will
maintain a record equivalent to that referred to in Rule 12.12 of these
Rules.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, CBOE included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The CBOE has prepared summaries, set forth in Sections
A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
CBOE is proposing to amend its margin rules, in a manner consistent
with the joint margin regulations of the Commission and the Commodity
Futures Trading Commission (``CFTC'')\4\ to incorporate security
futures. Specifically, CBOE is proposing to add a new provision (k) to
CBOE Rule 12.3 to address margin for security futures contracts. The
proposed amendments would: (1) Require the initial and maintenance
margin for security futures contracts to be 20 percent unless an offset
provision provides for a different margin requirement or the positions
are excluded from CBOE Rule 12.3(k); (2) allow for good faith margin of
certain positions in security futures contracts; (3) clarify that
security futures contracts have no value for margin purposes; (4) make
necessary conforming changes to other CBOE margin provisions; and (5)
make some non-substantive changes to CBOE margin rules for consistency
purposes.
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\4\ See Securities Exchange Act Release No. 46292 (August 1,
2002), 67 FR 53146 (August 14, 2002).
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The passage of the Commodity Futures Modernization Act of 2000 (the
``CFMA'') \5\ in December of 2000 enabled futures contracts on
individual stocks and narrow-based indexes to be traded in the United
States for the first time. The CFMA conferred upon the Board of
Governors of the Federal Reserve System (the ``FRB'') authority to set
margin requirements for security futures contracts. The FRB delegated
this authority to the SEC and the CFTC jointly, as permitted by the
CFMA. The SEC and the CFTC have jointly issued rules and
regulations.\6\
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\5\ Appendix E of the Pub. L. 106-554, 114 Stat. 2763 (2000).
\6\ See note 4, supra.
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CBOE's proposed margin requirements for security futures contracts
would adopt the provisions of the joint regulations of the SEC and CFTC
(''Joint Regulations'').\7\ Proposed new provision (k) to CBOE Rule
12.3 would require compliance with the security futures contract margin
requirements of the SEC and CFTC, in addition to the Exchange margin
rules and Regulation T of the FRB. Therefore, under proposed CBOE Rule
12.3(k)(1), the initial and maintenance margin requirement for a
security futures contract would be 20 percent of the current market
value of the contract unless an offset provision enumerated in 12.3(k)
or another rule provided for a different margin requirement.
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\7\ 17 CFR 242.400 through 242.406 and 17 CFR 41.42 through
41.49.
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The current market value of the contract would be calculated on a
mark-to-market basis at the conclusion of each trading day. Based on
the mark-to-market value of a security futures contract, a variation
settlement amount could be debited from or credited to a customer's
account balance at the conclusion of the trading day. These variation
settlement entries represent actual cash withdrawals from, or deposits
to, the account that will change its cash balance in the same way as
would any other routine cash withdrawal or deposit. When account equity
is computed, variation settlement amounts are automatically accounted
for in that they can be viewed as integrated into the cash balance,
which is a component of the formula for computing equity. Proposed CBOE
Rule 12.3(k)(2) would set a time limit for obtaining required margin by
incorporating by reference under CBOE Rule 12.3(k)(3) the same time
frame that the SEC's Net Capital Rule \8\ permits maintenance margin
calls to remain unsatisfied before the member organization must deduct
the maintenance margin deficiency in computing its net capital. In
other words, under the SEC's rules, if a customer did not satisfy an
initial or maintenance margin call on a security futures contract for
five days, the broker or dealer carrying that customer's security
futures positions would be required to take a deduction for the
undermargined customer account when computing its own net capital.
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\8\ 17 CFR 240.15c3-1(c)(2)(xii).
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CBOE Rule 12.3(k)(4) would expressly state that day trading rules
do not apply to security futures contracts. CBOE believes that a level
playing field should be maintained between the securities and futures
industries. Securities accounts would be at a competitive disadvantage
to futures accounts if CBOE, or any other securities self-regulatory
organization, were to impose day trading (i.e., intra-day) margin
requirements on security futures contract transactions in securities
accounts, because futures accounts are not subject to day trading
margin requirements. Moreover, the Joint Regulations do not implement a
day trading (i.e., intra-day) margin requirement.
Consistent with the Joint Regulations, the Exchange is proposing
lower margin requirements for a security futures contract held in
conjunction with an offsetting position in another security
[[Page 77114]]
futures contract, an underlying security, or an option on an underlying
security. Such lower margin requirements are appropriate for these
offsetting positions since the risk of the combined positions is lower
than the risk of the positions viewed separately.\9\ Therefore, the
Exchange proposes to incorporate all of the offsets identified in the
Supplementary Information section of the Federal Register release
announcing the final Joint Regulations, except for the offset involving
a broad-based index future (No. 17), as a broad-based index future
cannot be carried in a securities account.\10\ Under the enumerated
offsets, a person could have a margin requirement for a position in
security futures contracts that was lower than 20 percent. For example,
a person holding a long and a short securities futures contract in the
same underlying security, but having different expiration months, would
have a margin requirement of five percent of the current market value
of the long or short contract, whichever is greater. Under another
offset provision, a person holding long and short security futures
contracts in the same underlying security, with the same expiration
month, but listed and traded on different markets, would have a three
percent margin requirement. The offsets would be listed in table format
under proposed CBOE Rule 12.3(k)(6).
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\9\ In some cases only lower maintenance margin levels are
proposed.
\10\ See note 4, supra.
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A number of offsets involve a basket of security futures contracts.
For example, a basket of security futures contracts on individuals
stocks may serve as an offset to a security futures contract on a
narrow-based index or option on a narrow-based index. Also, a basket of
narrow-based security futures contracts may serve as an offset to an
option on a broad-based index. A definition of ``underlying basket'' as
pertains to security futures contracts is proposed.\11\ The primary
purpose of the definition of ``underlying basket'' is to require that
the composition of the basket match the composition of the index being
offset.
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\11\ See proposed CBOE Rule 12.3(k)(5)(D).
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The Exchange proposes to amend CBOE Rule 12.3(f) (Market-Maker and
Specialist Accounts) to permit options market-makers to receive good
faith margin treatment for hedging transactions in security futures
contracts that are based on the same underlying security as the options
in which they make markets. In addition, security futures contracts
that qualify for the exclusion from margin under the Joint Regulations
\12\ would be subject to margin that is satisfactory to the member and
the carrying broker or dealer.
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\12\ SEC Rule 400(c)(2)(v); CFTC Rule 41.42(c)(2)(v).
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CBOE proposes other amendments to the margin rules. Proposed
changes to CBOE Rule 12.5 would clarify that security futures contracts
have no value for margin purposes. Proposed amendments to CBOE Rule
12.2, Time Margin Must Be Obtained, and CBOE Rule 12.9, Meeting Margin
Calls by Liquidation Prohibited, would clarify that these rules do not
apply to security futures contracts. The proposed rule change also
makes necessary conforming changes to other margin provisions,\13\ and
other non-substantive changes being proposed for consistency purposes.
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\13\ See Proposed CBOE Rules 12.3(b), (f)(1)(A) and (D), (2)(A),
(3)(A)(i), (A)(ii), (A)(iii) and (A)(iv), (g)(i), (h), and (i)(2).
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
section 6(b) of the Exchange Act \14\ in general and furthers the
objectives of section 6(b)(5) of the Exchange Act \15\ in particular in
that it should promote just and equitable principles of trade, serve to
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and protect investors and the
public interest. CBOE notes that the proposed rules are intended to
implement the margin requirements for security futures contracts in the
Joint Regulations. CBOE believes that the proposed rule change would
remove impediments to trading security future contracts and promote
just and equitable principles of trade by incorporating security
futures and appropriate offsets into CBOE's margin rules in a manner
that will promote competition and permit people to utilize security
futures contracts for hedging purposes. As such, the proposed rule
change is consistent with and furthers the objectives of Section
6(b)(5) of the Act, in that it is designed to perfect the mechanisms of
a free and open market and to protect investors and the public
interest.
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\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
This proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Act. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW, Washington,
DC 20549-0609. Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Section, 450 Fifth Street,
NW., Washington, DC 20549. Copies of such filing will also be available
for inspection and copying at the principal office of CBOE. All
submissions should refer to the File No. SR-CBOE-2002-67 and should be
submitted by January 6, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-31590 Filed 12-13-02; 8:45 am]
BILLING CODE 8010-01-P